DYNAMIC P OWERP OINT™ S LIDES BY S OLINA L INDAHL
CHAPTER
6(21)
Macroeconomics:
The Big Picture
The Origins of Macroeconomics
Hoover’s failure to understand what caused
the Great Depression (or how it could be
tamed) was common at the time.
Microeconomics was well-developed;
macroeconomics was not.
The effort to understand economic slumps
and find ways to prevent them is at the core
of macroeconomics.
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Hoovervilles
During the Great Depression, “Hoovervilles” sprang up
across America, named after the economically clueless
President Herbert Hoover.
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The Nature of Macroeconomics
Macroeconomic Questions
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Macroeconomics: Theory and Policy
Pre-1930s conventional wisdom
Self-regulating economy: Problems such as
unemployment are resolved without
government intervention through the
working of the invisible hand.
Post-1930s conventional wisdom
Keynesian economics: Economic slumps are
caused by inadequate spending, and they can
be mitigated by government intervention.
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Macroeconomics
“The long run is a misleading guide to current
affairs. In the long run we are all dead.
Economists set themselves too easy, too useless a
task if in tempestuous seasons they can only tell
us that when the storm is past the ocean is flat
again.”
John Maynard Keynes, A Tract on Monetary Reform (1923) Ch. 3
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The Business Cycle
Since the 1930s, the U.S. (and most national
governments) uses tools to improve the economy.
Monetary policy: uses changes in the quantity of money
to alter interest rates and affect overall spending.
Fiscal policy: uses changes in government spending
and taxes to affect overall spending.
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Comparing the Great Recession to the Great
Depression
Measures of economic activity and world industrial production during the Great
Depression and the Great Recession
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Images of the Depression
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Charting the Business Cycle
“Please stand by for a series of tones. The first
indicates the official end of the recession; the second,
prosperity; and the third, the return of the recession.”
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Charting the Business Cycle
Recessions (contractions): periods of economic
downturn, when output and employment are
falling.
Expansions (recoveries): periods of economic
upturn, when output and employment are rising.
Business cycle: the short-run alternation between
recessions and expansions.
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The Business Cycle
The point at which the economy turns from expansion to
recession is a business-cycle peak.
The point at which the economy turns from recession to
expansion is a business-cycle trough.
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The Pain of Recession
The most important effect of a recession is its
effect on the ability of workers to find and hold
jobs.
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Taming the Business Cycle
The business cycle is a main concern of modern policy
makers: they try to smooth out the business cycle. They
haven’t been completely successful.
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Active Learning: Practice
The use of taxes and government spending
to change the overall level of spending in an
economy is called:
a) monetary policy.
b) fiscal policy.
c) either monetary or fiscal policy
depending upon what is happening to
the interest rate.
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To Next
Active Learning
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Active Learning: Practice
Do you think the government is right to begin
massive spending programs during deep
recessions?
a) Yes
b) No
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Active Learning
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Long-Run Economic Growth
Long-run economic growth is the sustained
upward trend in the economy’s output over time.
Source: W. Michael Cox and Richard Alm, “How Are We Doing?” The American (July/August 2008).
http://www.american.com/ archive/2008/july-august-magazine-contents/how-are-we-doing
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Growth, the Long View
Americans have become able to afford many more material goods
over time thanks to long-run economic growth.
Sources: Angus Maddison, Statisticson World Population, GDP, and Per Capita GDP, 1–
2008AD,http://www.ggdc.net/MADDISON/oriindex.htm; Bureau of Economic Analysis.
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Growth, the Long View
Long-run growth is a relatively modern phenomenon.
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Inflation and Deflation
A rising overall level of prices is inflation.
A falling overall level of prices is deflation.
The economy has price stability when the overall level of
prices changes slowly or not at all.
Rising Prices offset most of the rise in average wages.
Source: Bureau of Labor Statistics
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The Causes of Inflation and Deflation
In the short run, movements in inflation are
closely related to the business cycle.
When the economy is depressed and jobs are hard to
find, inflation tends to fall; when the economy is
booming, inflation tends to rise.
In the long run, the overall level of prices is mainly
determined by changes in the money supply.
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The Pain of Inflation and Deflation
Both inflation and deflation are problematic.
Inflation discourages people from holding
onto cash (because cash loses value if prices
are rising). In extreme cases, people stop using
cash altogether.
Deflation can cause the reverse problem. Since
cash gains value if the price level is falling,
holding on to it is more attractive than
investing in new factories and other
productive assets. This can deepen a
recession.
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International Imbalances
The United States is an open economy: it trades
goods and services with other countries.
In 2010, the United States ran a big trade deficit.
Trade deficit: the value of goods and services
bought from foreigners is more than the value of
goods and services sold to them.
Trade surplus: the value of goods and services
bought from foreigners is less than the value of
the goods and services sold to them.
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Active Learning: Practice
This year the value of a country’s imports is
equal to $1.2 billion, and the value of its
exports is equal to $1.3 billion. This country
is running a:
a) trade surplus.
b) trade deficit.
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